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Executive Compensation and Say on Pay

Executive Compensation and Say on Pay

Executive Compensation and Say on Pay

Executive compensation has been a major corporate governance topic since the 1990s. Jensen and Murphy’s seminal article, “CEO Incentives: It’s Not How Much You Pay, But How” (68 Harvard Business Review 138 (1990)) effected a major paradigm shift in this area. Executive compensation, which had previously been viewed as a fiduciary duty problem, was reinterpreted as an issue of misalignment of managerial and shareholder interests. Under this paradigm, pay for performance became a self-executing governance technique to align the interests of management and shareholders, providing incentives for superior corporate performance.

Since the 1990s, there has been much debate about whether executive compensation is determined efficiently by disinterested directors (the optimal contracting model) or whether there are systemic problems in executive pay due to the ability of corporate managers to exert control over the pay-setting environment and process (the managerial power model). The primary focus under optimal contracting model was on the design and structure of optimal compensation contracts. The managerial power model, however, suggested the need for stronger regulatory techniques to reduce management’s inherent power advantage and flaws in compensation arrangements.

There have been two major shocks to financial markets since the time of Jensen and Murphy’s influential article – (i) the collapse of Enron and WorldCom in the United States, and analogous international scandals at the turn of this century; (ii) the 2007-2009 global financial crisis. Many regarded executive compensation to be a contributing factor in these crises, and there was growing concern about wealth concentration and income inequality. This led to the introduction around the world of new regulatory techniques to control executive compensation.

Perhaps the most high profile of these techniques was “say on pay”, which accords shareholders stronger participatory rights in relation to executive compensation. Many jurisdictions have now adopted say on pay. Although the trend might, at first sight, suggest regulatory convergence, there are, in fact, a range of different forms of say on pay, with varying levels of stringency and shareholder power.

Say on pay is itself highly controversial. It inevitably shifts more power to institutional investors, and arguably gives them a quasi-regulatory role with respect to executive pay. Some commentators view this as a valuable check and balance on managerial power in a dispersed ownership context, and as consistent with institutional investors’ evolving stewardship role. Others, however, regard shareholders as at least partly responsible for perverse incentives in executive pay. According to these commentators, say on pay represents a dangerous regulatory development, which has the potential to harm other stakeholder groups.

ECGI will continue to track the progress of research in this area and related developments. Additional resources will be made available through these pages.

This paper examines the impact of enhanced executive remuneration disclosure rules and the introduction of dual voting rights under UK regulations of 2013 on the voting patterns of shareholders. Based on a hand-collected dataset of the pay...Read more

Widely-cited theoretical models predict that large shareholders will monitor management, while small shareholders will free-ride. However, we find that institutional investors are particularly likely to oppose management on Say-On-Pay for their...Read more

Do employees who compare themselves to the CEO matter for executive compensation? We hypothesize employees who are behindness averse and compare their wage to the CEO’s pay. Using German establishment-level wage data, we indeed show that employee...Read more

This paper studies how firms’ important customer relationships can affect the choice of CEO compensation structure. We hypothesize that having major customers raises the costs associated with CEO risk-taking incentives, leading to lower option-...Read more

We study if a CEO’s equity-based compensation affects the expected value generation in takeovers. When the objectives of management and shareholders are more aligned, as proxied by the use of equity-based compensation, more value-maximizing...Read more

This paper reviews the theoretical and empirical literature on executive compensation. We start by presenting data on the level of CEO and other top executive pay over time and across firms, the changing composition of pay; and the strength of...Read more

We consider a model in which shareholders provide a risk-averse CEO with risk-taking incentives in addition to effort incentives. We show that the optimal contract protects the CEO from losses for bad outcomes, is convex for medium outcomes, and...Read more

In this paper we analyze the relationship between conformity to executive remuneration
standards, corporate ownership, and the level and structure of CEO compensation for
large European listed companies in the years 2007 and 2010. We...Read more

This paper reviews the theoretical and empirical literature on executive compensation. We start by presenting data on the level of CEO pay over time, across firms, and compared to non-executive pay; the changing composition of pay; and the...Read more

This paper examines how executive pay is set when a firm is a business group member. Using Korea as a laboratory setting, we find that member firm?s cash compensation for its executives is positively linked to the stock performance of other...Read more

We analyze the payout channel choice of listed UK firms and examine whether the choice between dividends, share repurchases, a combination of payout channels, or
complete earnings retention is affected by investor sentiment, taxation, major...Read more

Shareholders have long complained that top executives are overpaid by corporate directors irrespective of their performance. Largely powerless to stop these practices, in 2002, they prevailed upon the U.K. Parliament to adopt legislation...Read more

Say on pay is considered an important tool to mitigate inappropriate remuneration practices. Over the years, many countries provided shareholders with this say on pay-tool, although often the vote is exclusively of an advisory nature. We analyse...Read more

This paper estimates the effects of Say-on-Pay (SoP); a policy that increases shareholder ?voice? by providing shareholders with a regular vote on executive pay. We apply a regression discontinuity design to the votes on shareholder-sponsored SoP...Read more

The Dodd-Frank Act of 2010 mandated a number of regulatory reforms including a requirement that large U.S. public companies provide their shareholders with the opportunity to cast a non-binding vote on executive compensation. The
“say on...Read more